Analysts at DBS Group Research and OCBC Investment Research have both kept their “buy” calls on digital entertainment, e-commerce, and digital financial service company, Sea, following its 4QFY2023 ended Dec 31, 2023, results. Sea is incorporated in Singapore but listed on the New York Stock Exchange (NYSE).
While DBS has maintained its target price of US$75 ($99.81), OCBC has raised its fair value to US$80 from US$64 previously.
DBS analyst Sachin Mittal is positive on the group’s e-commerce segment, as there are drivers pointing to higher visibility for profits. Sea has guided for high-teens gross merchandise value (GMV) growth in FY2024 and e-commerce turning adjusted Ebitda positive in 2HFY2024. Management sees healthy growth in GMV, as well as stable competition in the e-commerce business in 1QFY2024 despite Tokopedia and TikTok Shop merging in December 2023.
“Growth is underpinned by improving unit economics in the live-commerce business and TikTok Shop being less aggressive after the merger. In-app transactions on TikTok Shop may not continue in Indonesia after it becomes fully compliant with local regulations by mid-March,” writes Mittal.
Meanwhile, with the removal of India’s previous ban on Sea’s game, Free Fire, the company now expects its user base and bookings on the game to grow by double-digits in FY2024.
New content in the games Arena of Valor and Call of Duty Mobile, are other key drivers for gaming, adds the analyst.
He also notes: “Fintech will also see solid growth from lower cost of funding for its lending business, as Sea is becoming a preferred lending platform.”
Overall, with more visibility on e-commerce turnaround, Mittal values Sea’s e-commerce at a 2.0x earnings-to-value ratio (EV)/FY2024 revenue, compared to the global e-commerce peers’ average of 2.9x.
“We project a 5%/6% growth in group adjusted ebitda (ex-e-commerce losses) in FY2024F/FY2025. We continue to value the gaming and fintech business at 12.0x EV/ ebitda (peers trading between 12.0x 17.0x). We have factored in US $4.1 billion in net cash,” writes the analyst.
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He adds: “We assign a 1x EV/revenue for its e-commerce business, and a 10x EV/ebitda for the rest of the company (gaming & fintech), with $3.1 billion net cash.”
However, Mittal understands that the gaming business lacks long-term visibility, he writes: “While the business is likely to be stable over the next year or two, the company must find new hit games to defend its gaming adjusted ebitda in the long term, which may pose a challenge.”
On the other hand, OCBC analyst Ada Lim is more bullish on the company, thanks to its 4QFY2023 results beating consensus estimates on the back of its stronger-than-expected e-commerce performance, resulting in her increased fair value estimation
She writes: “In FY2023, the company guided on a realignment of strategy to increase investments into Shopee and grow its market share, which may lead to losses from time to time.”
“With the company’s businesses enjoying strong potential in a growing region, we believe that the management is repositioning the company to tap on further growth going forward, which is the right strategy in the long-term,” continues Lim.
While the analyst notes that Sea’s e-commerce business has seen a reacceleration of growth in the past few quarters, she is cautious to comment too early on whether the company’s execution of its long-term growth strategy is on track, especially with TikTok Shop’s absence from the Indonesian e-commerce market for the most part of 4QFY2023.
Lim adds: “However, we continue to believe that the company’s decision to invest in growth is the right strategy for the long-term, given the significant growth potential in its businesses and an ever-evolving competitive landscape that could potentially intensify in the near future amidst TikTok’s return to the Indonesian market through a direct stake investment in Tokopedia.”
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Potential catalysts noted by the OCBC analyst include material improvement in competition in the e-commerce landscape, more high-profile self-developed games from Sea and a stronger-than-expected GMV growth.
Conversely, investment risks noted by her include regulatory pressure in key markets, execution risks in new markets leading to increased losses, as well as a weaker-than-expected game pipeline and lacklustre performance of new games.
Shares in Sea last traded at US$58.41 on NYSE, 1.2% higher for the day on Mar 11.
